Equal Weight S&P?

[beafet]

http://www.smartmoney.com/invest/strate ... SM_hp_ls4e

What do you all think of using something like RSP instead of SPY in your PP?

[MachineGhost]

http://www.smartmoney.com/invest/strate ... SM_hp_ls4e

What do you all think of using something like RSP instead of SPY in your PP?

First, I would check its performance against Total Market index, then account for the difference in returns with the additional management fees and trading frequency and see if it still makes economic sense.

Back when the first index fund came out, they wanted to do it equal weighted but it was just too complicated to do without computers.

MG

[stone]

The difference is because of volatility capture isn't it? I'm still not convinced that the best way to hold stocks wouldn't be to have ten decent diversified stocks each as 2.5% of a PP.
A full index with equal weights doesn't have a screen to spot stocks that fail to qualify as "decent". Perhaps I'm being naive but my guess is that if just ten diverse decent stocks were chosen then the chance that stinkers would be chosen wouldn't be high

This came up in the topic:-
http://gyroscopicinvesting.com/forum/ht ... ic.php?t=7

[TripleB]

You'd need 30 stocks to get maximum diversification value per number of individual stocks.

Look at the Dow 30. It's 99% similar to the SP500 and 95%+ similar to TSM. And it's only 30 stocks.

[MachineGhost]

You'd need 30 stocks to get maximum diversification value per number of individual stocks.

Look at the Dow 30. It's 99% similar to the SP500 and 95%+ similar to TSM. And it's only 30 stocks.

Thats true, but at that point and beyond it ceases to be much of a contribution to volatility.  I suppose one way to settle the question is to backtest a PP using the DJIA and see if more volatility is captured than with the S&P500.

In reality, investors hold about 10 stocks to maximize their wealth utility.

MG

[stone]

Isn't the Berkshire Hathaway stock portfolio massively skewed to the ten or so largest holdings?

I think there is a massive difference between volatility of the stock holdings as a group and volatility capture from within the stock holdings. Imagine having say three gold mining stocks. Those stocks would zig and zag somewhat in unison giving a lot of volatility when viewed as a group. A portfolio with a tech stock, a tobacco stock and a gold mining stock would have a good deal of counter directional zigs and zags between the three holdings and so have less volatility when viewed as a group. BUT if those three individual stocks were rebalanced against the non-stock part of a PP or FTM portfolio, then there might be lots of volatility capture even though the diversified stock portfolio showed less overal volatility.

With a market capitalization weighted index, the component individual stocks shrink and expand and all of that volatility slips by with the only volatility capture coming to the extent that stocks as a group have coincident volatility (and then that is captured by rebalancing against LTT, gold or whatever).

[Jan Van]

And then there are the Greenblatt value weighted "indexes", FVVAX and FNSAX, how about those? He's talking about that in his latest book...

[alvinroast]

I was just re-reading 'What works on wall street' last night. He uses equal weighting on ALL of his test portfolios. He also includes the S&P500 for comparison sake.

Based on that it seems like you could get more volatility and a higher return with several of his portfolios. Most of them are 25 or 50 stocks, but he also lists the backtested results for some larger categories: All-Stocks, Lg Cap, Sm Cap, etc. (all equal weighted).

I'm thinking about using a couple of those portfolios as my own equal weight fund. The problem is the expenses will be more like .35 rather than .07 for a TSM fund. This is where the expenses can really get out of hand with trading costs since he rebalances yearly. It seems like RSP would be similar since it has similar expenses, but lower turnover.

I still wonder about the specific correlation between each alternative stock fund and the gold/bonds/cash. Small stocks are more volatile and have higher returns that large stocks, but they may not actually have the 'non-correlation' with the PP components that's desired. I would be interested in learning more.

[MachineGhost]

I still wonder about the specific correlation between each alternative stock fund and the gold/bonds/cash. Small stocks are more volatile and have higher returns that large stocks, but they may not actually have the 'non-correlation' with the PP components that's desired. I would be interested in learning more.

That's the issue when slicing and dicing.  The best way to deal with it is to ignore size, but ignoring value is a lot harder to do since its pretty dumb to overpay for a discounted stream of cash flows.  But that's what you get when you buy a market-cap weighted index.

MG

[dualstow]

http://www.smartmoney.com/invest/strate ... SM_hp_ls4e

What do you all think of using something like RSP instead of SPY in your PP?

The expense ratio is a bit high.

[SteveGo]

You might consider a mid cap index fund like VO instead of an equal weight fund like RSP. Expenses are low, and the performance is almost identical.

When you think of it, equal weighting emphasizes the lower cap stocks in the index. So why not just use the mid-caps. A few simulations at kwanti.com bear this out.

I were just starting out, I would consider a mix of VTI and VO for the stock portion of the PP.